Wednesday, September 16, 2015

Job interview questions: The size and scope of Alibaba

Recently Bronte advertised for an entry level position. We have now hired.There was one interview question which nobody gave an entirely satisfactory answer to, and many people gave unsatisfactory answers to.This is not surprising. I don't have an entirely satisfactory answer either. The question was about Alibaba - the Chinese internet giant - and the only reason I am going public is that Barrons has asked several of the same questions and Alibaba has responded.As preamble I told the prospective employees what Alibaba was and what Singles Day was. This was graduate recruitment so I could not be sure that everyone would know even that. So I said:i). Alibaba inside China is the biggest but not only online shopping site with Tabao and TMall. These were essentially flea-markets where lots of people had stalls (shops within shops) and they sold a huge number of items. Think of it as a combination of Amazon and Ebay and you will not be far wrong.

ii). Alipay is the standard way of paying for something online. Think of it as the equivalent of PayPal. Note there is a major competitor (Tenpay).

iii). Singles Day is a sort of anti-Valentines Day. On Valentines Day if you are attached you go out with your beloved. On Singles Day you go out and try to find a beloved. However more importantly it was the big day of online sales - think of it as Black Friday in America or Boxing Day in Australia. It is the biggest shopping day of the year.

I then gave the candidates two stories about Alibaba on Singles day. One was sourced from the BBC and one from an Australian website. The BBC reported in US dollars, the Australian site reported in Australian dollars. [Ultimately both are sourced from an Alibaba press release.]I also indicated that the questions would be along the lines of "how interesting is this" and "how much bigger can it get". The rule of thumb of course is that if an internet company can grow 500% from here you probably should own the stock. However if it is near the end of its growth period you should not own the stock - because it will derate.Here were the articles - and I want you to read as if you were doing the job interview. Allow yourself 15 minutes...The BBC article...and the Australian article...http://www.powerretail.com.au/news/singles-day-2014/Starting question: How much bigger can this get?Lots of people started by arguing from China's growth rate - and they got projections 5x, 10x bigger than now. But a few noted that 278 million deliveries on Singles Day was "a lot" and thought that maybe it could double from here but ten times was not likely.But at this point I wanted to explore the 278 million deliveries number. So the question is "how many internet users in China". Most people guessed a number that was reasonable - so I pointed them to official numbers. Roughly 650 million would be a good guess. The official number at the end of 2013 was 618 million - and the growth rate has already slowed.So there was 278 million deliveries for a total prospective 650 million users. In one day! The question is how much bigger can this get and what drives it to be bigger?I then pointed them to official numbers that said that Amazon (worldwide) had 244 million users. That was 244 million separate accounts made at least one order in the past twelve months. The Amazon numbers are here.Alibaba delivered more parcels in a single day than Amazon had users in a whole year.Most people then figured that the users had multiple deliveries which is I guess a possibility. However it worth comparing this to Cyber Monday in the US. This article - which I presume is accurate - gives Amazon orders for Cyber Monday. To quote:

In order to uphold its reputation for fast deliveries, Amazon hired 80,000 seasonal workers in anticipation of Cyber Monday and the holiday shopping season, according to a report released by the company. Last year, Amazon sold about 426 items per second on Cyber Monday, and the online retailer expects to sell even more this year.

426 items per second is almost 37 million items. This is more directly from an Amazon press release. Singles day is 7.5 times bigger. To match Amazon in timeliness of delivery they would need to hire 600 thousand seasonal workers who work at the same efficiency as Amazon workers. Note that Amazon workers work with a lot of robots and other technology to pick and file and deliver items.The Alibaba 20-F (the SEC filed annual report) does not show anything like this number of employees... to quote:

Employees

As of March 31, 2013, 2014 and 2015, we had a total of 20,674, 22,072 and 34,985 full-time employees, respectively. Substantially all of our employees are based in China.

The following table sets out the breakdown of our full-time employees by functions as of March 31, 2015:

Function

Number ofemployees(1)(2)

Engineers

12,822

Customer service

2,858

Others

19,305

​

​

​

​

​

Total

34,985

​

​

​

​

​

​

​

​

​

​

(1)

The number of employees presented in this table does not include third-party consultants and contractors that we employ, substantially all of whom are based in China. These consultants and contractors primarily performed work related to sales, research, logistical support and customer service.

(2)

Our total number of employees increased to 34,985 as of March 31, 2015 from 22,072 as of March 31, 2014. Of the increase in employees, approximately 7,300 was due to the completion of our acquisitions including UCWeb, OneTouch, Alibaba Pictures and AutoNavi, and a majority are engaged in engineering and data analysis.

At the accounting date the total number of employees was under 35 thousand. Amazon - which has much smaller peak loads and far more obvious investment in high efficiency warehouses has more than 150 thousand employees.However Footnote 1 on the above table notes that this does not include "third-party consultants and contractors that we employ, substantially all of whom are based in China. These consultants and contractors primarily performed work related to sales, research, logistical support and customer service."If Alibaba were as efficient as Amazon (meaning just as many computers/robots etc) and had the same delivery schedules as Amazon there would need to be about a million employees at Alibaba and its consultants and another 600 thousand or so seasonal employees around Singles Day.These numbers are consistent with the annual report.Again to quote the 20-F.

We believe that orders from transactions generated on our marketplaces represented a significant portion of our delivery partners' total delivery volumes in the twelve months ended March 31, 2015. According to data provided by them as of March 31, 2015, our top 14 strategic delivery partners employed over 1,400,000 delivery personnel in more than 600 cities and 31 provinces, directly controlled municipalities and autonomous regions in China. Collectively they operated more than 100,000 delivery stations. This network managed the delivery of over 8.6 billion packages from our China retail marketplaces to consumers in the twelve months ended March 31, 2015.

It may be possible that Alibaba has outsourced logistics almost entirely - with a million outsourced employees controlled by 35 thousand in-house employees. The numbers in the annual report are consistent with this. This however is a much more "virtual" view of Alibaba than I had previously held. Amazon wins through logistical superiority. You would not want to compete with them. Alibaba it seems wins through logistical outsourcing of the highest quality.We should also note the scale of the 8.6 billion packages the network claims to have delivered. UPS delivered 4.6 billion packages per year and had 435 thousand employees, 539 aircraft (including charters), about 100,000 delivery vehicles and almost 2000 operating facilities. [UPS factsheet here.]To truly deliver at a larger intensity than Amazon Alibaba and its outsource network would need more staff or capital (or both) than Amazon and UPS combined.

The size and scope of Alipay

Only a couple of my candidates (all of whom wound up on the short list) noticed the throw-away line in the Australian article about the size of Alipay. To quote:

At the peak of the event, 2.85 million transactions were processed every minute by Alipay.

Now I asked "how many transactions per day do you think is 2.85 million in the peak minute"?

If they started to multiply by 60 and then 24 this was a problem. Obviously the peak minute is much higher than the volume at 3AM. I mean when have you ever used PayPal at 3AM? The peak day is obviously enough less than 24 hours worth of the peak minute.A pretty good guess is that the peak day should be between 4 and 9 hours of the peak minute (in other words the peak day is somewhere between 2.85*60*4 million transactions and 2.85*60*9 million transactions). This seems sensible. I have discussed with several people in the payment industry the ratio of peak minute to peak day volumes and got numbers in this range - but I do not have definitive numbers. [If someone from PayPal or Visa wants to come through with something definitive I would like it.]

7 hours of peak minute (which my informal research says is reasonable) is about 1.2 billion transactions in the day. That is two per internet user in China. That is to say a large number.

Now Alipay is roughly the equivalent of PayPal. It might be used more than PayPal because people send remittances on it. It is unlikely to be used as much as Visa. After all Visa is used in the shops all the time. Look at your own life and ask yourself how much you use Visa and how much you use PayPal.

Visa's peak transaction volume globally is only about 30 percent of Alipay's peak minute. This suggests a level of shopping in China that puts the US, Europe and most of Asia to shame.

So I asked: Are there any other ways of reconciling these numbers?

Some people suggested (a) multiple deliveries for items, (b) that many of the items delivered were virtual items such as emoji and their delivery is not technically problematic and (c) insufficient data handling capacity and hence queuing explaining the almost absurdly large peak minute on Alipay.

So I asked: How would you test this. And I got some interesting answers - some of which might require a little work to pan out. However some answers wound up looking silly. If you think for instance that a substantial proportion of the transactions are low-value emoji then the remaining transactions wind up with implausibly high average value.

But a few - knowing Bronte's history - suggested that we could not dismiss the idea that Alibaba was faking their numbers.

Most people who suggested that knew what an extraordinary (and potentially outrageously profitable) suggestion it was. After all some two-bit reverse merger Chinese company might be a fraud - but you can only make a limited profit from that. The idea that Alibaba - a company with half the market cap of Google might be making its numbers up is - well - extraordinary.

(b) extraordinary claims offer extraordinary opportunities for profit (as the market is very wrong) and hence it might be worth gathering the evidence so we can accept or reject the extraordinary claim.

And so here was the key point to the question: how would we go about gathering that evidence and what sort of evidence would you require to put the trade (short Alibaba) on?I should be clear that I do not have the extraordinary evidence - but I do think it is a thesis worth testing...

This was a tough question - and I did not expect many (if any) good answers. So I am going to leave it to you dear readers for comments. I am perfectly willing to accept answers which demonstrate that the "fake numbers" thesis is wrong. Indeed the thesis is extraordinary and hence likely to be wrong.

However before I go I should look a little at delivery data. The 20-F (quoted above) suggested that the delivery network had 1.4 million employees and over 100,000 delivery stations. This suggests an average of 14 employees per delivery station and there must be a huge number with less than 10 employees including the truck drivers who actually do the delivery.

Ramping something with this lack of automatic sorting technology up for Singles Day would require a lot of staff. Some candidates thought of trying to count them.With 100,000 delivery stations it is unlikely to be possible to do it on a statistical basis by counting trucks. There are far too many locations and they are too heterogeneous.

Maybe you could do it with official employment numbers. But in China that is almost certainly a dead end. Chinese employment numbers are amongst the most suspect of all Chinese economic data.Alibaba's own promotion material contains several videos of their logistic operations. Here is a video interview of a woman describing the seasonal work packing boxes for Singles Day.http://www.alizila.com/chinas-1111-shopping-festival-sees-massive-sales-first-few-minutes-videoThe woman states she will normally pack about 200 packages a day but on Singles Day she will do 800-900. If it takes her 50 seconds to pack a package (reasonable looking at the process) and she takes 5 minutes break per hour packing 800 packages will take about 12 hours. I guess that is reasonable. But to do the volume for Singles Day would require 350 thousand such people just in packaging, not even delivering.The company has videos of its logistics as well. Here is a summary video - with pictures of the delivery network:(The original can be found here...)The company also has b-roll material (which they license widely) which has quite extensive video of the conveyor belt systems and the sort.Strangely much of the material involves people standing around and multi-handling material on conveyor belts rather than doing the real function of a sorting facility (that is making choices therefore sorting).Similarly there is b-roll material of packaging happening in one of Tabao's merchant shops. This involves distinctly low-tech (and slow) packaging and sorting for Singles Day. It is however clearly in part aimed at a Western audience (and presumably Western investors) as the whiteboard is in part in English.We have some data about the size and the amounts of capital deployed in this delivery network. Here is a relatively old fact sheet (stated volume has risen substantially since then).http://www.alizila.com/fact-sheet-cainiao-alibaba-groups-logistics-platformHere is an article and video about Alibaba/Tabao rural service centers:http://www.alizila.com/cainiao-alibabas-logistics-arm-opens-videoThere is some evidence in this video about people making multiple orders as in some rural centers there is a single woman who places multiple orders for an entire village. The distribution center however is not heavily endowed with advanced technology. There is no evidence that in any way the capital equipment at Alibaba and its distribution partnership comes close in scale and quality to the infrastructure of (say) UPS. However the delivery volumes are larger than UPS and Fedex combined and the employment levels are similar (in aggregate).It is worth comparing this to videos of Amazon's warehouse and packing system. There is also a Fedex and UPS documentary on Bloomberg which gives some idea of the scale of these behemoth organisations. When this was filmed (2012) the combined volume of UPS and Fedex was well below the volume of Alibaba's delivery network. Still it is worth comparing how much capital equipment the US giants have to how little is in the Alibaba network:At this point I know the numbers are wonky - but working out whether this is material or not (or how material) will require some fine measurement techniques.

The two best candidates both had good ideas on this - but again testability is going to be hard. I would accept ideas by email too.

87 comments:

- Quantification of a certain product needed for delivery: trucks, scanning machines, etc- Quantification of warehouse capacity needed for delivery: can it satisfy peak demand?- Quantification of labour needed for delivery: slack in the labour market enough to satisfy temporary worker demand?- Estimate Baidu search query spike to see how much Singles Day shopping is likely to have increased compared with other dates of the year- Check with supplier data: delivery volumes for Shunfeng 顺丰 etc- Double-check government VAT tax receipts- Double-check macro data on retail sales, and compare with retail as % of GDP figures- Double-check with a popular item sold on Taobao/Tmall: how much do their sales go up on Single Day?- Customer surveys: "how many packages do you buy 1) on Singles Day 2) per year"?- How much do competitors' sales (eg JD.com 京东 or Amazon.cn 亚马逊) go up on Singles Day: contrast and compare- Check whether Alibaba has lied in the past, if so they are likely to have continued to do so- Check cash flows: if Singles Day is a huge event, then cash flows are likely to spike for that quarter (OCF can be manipulated though, as they seem to be doing)- Ask industry experts: consultants, professors. If anyone, they should be able to come up with ideas on how to double-check the numbers

The volume comparison (thus labor required) between amazon and alibaba is not a great one. Mainly because amazon holds inventory and needs workers to pack and deliver. Whereas, alibaba, is more like ebay in this area. It is a platform for merchants. The merchants are 'individually' responsible for packing and delivering.

Reach out to German retail giant Metro and verify that the only thing Alibaba does for their TMALL shop at https://metro.tmall.hk/ is assisting in customs clearance. As far as I understand everything else, logistics, warehousing, packaging is handled by Metro and its employees. The question is... how much of that insane Singles Day volume is handled by Alibaba and how much by its Tmall merchants with little or no involvement of Alibaba workers.

interesting article and very well written. I just want to add some personal experience as a foreigner living in China. It is 4pm in the afternoon and my wife has received already few deliveries from Taobao. In my office (20 people) the door constantly rings with deliveries. I estimate that each person receives on average at least 1-2 deliveries per day from taobao. I don't really know how to explain it - Taobao is so pervasively embedded in people's everyday life and shopping habits that it is difficult to believe unless you experience it. When my family spend summer back in the US, we never shop on Amazon as much as we shop on Taobao. We buy something on Amazon perhaps once a week I would say. Ok, twice. But here we buy something on Taobao EVERY DAY. And normally multiple purchase every day. I (nor anyone I know) ever goes to a mall to buy something. The sheer size of cities makes it so much more convenient to get your shopping done on Taobao that it makes no sense to do otherwise. Regarding Alipay, it is widely used not just to buy items on taobao. I give you an example - today I purchase some coffee capsules from Nespresso. Alipay is the payment system. Very few commerce sites in China ask for credit card numbers (penetration is still low). Everyone asks for your Alipay login. So I would not be surprised if a significant amount of transactions on Alipay has nothing to do with Alibaba core business. Regarding logistic during single day. Again, it is difficult to describe. I will give you some anecdotal evidence. There are two stores near my office - neighborhood-size logistic centre (third party. There are several logistic companies and yes, Alibaba owns stake in the largest if I am not mistaken). When you see the word logistic center don't think of the super massive infrastructure that Amazon operates. Sometimes there are multiple centers servicing just a neighborhood - a-la mom and pop. As a cycle to work, these centers are normally closed (early in the morning) and if I stroll by during the day, they are busy but nothing strange to really notice. During Single Day - oh man. It is incredible. The packages spill out of the store, on the sidewalk and occupy part of the street disrupting traffic. It is a madhouse at all time of the day and nite - hundreds of people coming and going. Delivery men stacking up their bicycles and scooters to the brim. It is hard to believe. And indeed delivery times lengthen a bit. normally you get something from tabao within 24h. No matter where the seller is in China. It is freaking efficient. I don't know how it is done. During Single Day, I think deliveries lengthen to 48h or 72h. And yes - taobao is predominantly an infrastructure where each seller runs its own business. I am not sure this helps at all the convo.

I am an equity analyst in an Asia hedge fund and I cannot help to leave a comment on this Blog. I really suggest writer of such articles to consult Company before you make accusations, because some of the questions will be easily answered (of course, unless some of the writers are ill motivated).

Regarding this case, 1. One of the most basic concept is that Alibaba has a different business model with Amazon, as has been pointed out already in the previous comments. Alibaba operates a platform, which allow sellers and buyers to transact. Alibaba's revenue comes from commission and advertising.

In other words, unlike Amazon, Alibaba itself does not operate warehouses or delivery teams, and they do not take inventory risk. Comparing Alibaba's staff number with Amazon and thus draw a conclusion of logistics capacity is not appropriate.

2. China Smart Logistics, which showed up a couple of times in the article, is a Logistics Information System company. I have to emphasize again, Information System. There is no warehouses or logistics team.

3. The 278mn orders is the orders made on that Single Day, which does not automatically mean that all 278mn orders are delivered on the single day. In fact, the 278mn orders could take many days to complete, depending on the logistics capacity of sellers on Alibaba's platform.

I don't want to write too long, but you get the idea. Please further investigate and clarify with company if possible. JD.COM (JD:US) is more close to Amazon's business model in China, FYI.

However, as others have noted, the premise of the question seems to be a misunderstanding of Alibaba's business. Alibaba is mainly a shopfront (eBay). Alibaba introduces buyer and seller and then 'supervises' the sales transaction through things such as "buyer protection" http://activities.aliexpress.com/adcms/www-aliexpress-com/buyerprotection/index.php?spm=2114.11010108.1000001.1.EGb058. Its not true escrow but it seems to work.

The merchants themselves stock, pack and dispatch purchases. Ali's Singles Day number is basically just recording transactions which it has booked for other merchants.

I think Alan has made the point. Once a mainlander, here is my 5 cents:

The 3 biggest logistics companies, mainly partner with Taobao, are SF Express, ZTO Express and STO Express. SF Express has international network. The rest 2 are mainland only. SF Express has 12000 'service centers' in mainland China, according to their website: http://www.sf-express.com/cn/en/others/about/expanding/ It is reasonable to assume the three have more or less the same size of network. So total service centers are about 36000, which means each service center need to handle 7700 orders to fulfill 278mn orders on singles day. I think that isn't entirely impossible.

Chinese logistics companies might not have the technology Amazon has, but the workers are much more hardworking. Because the service centers are mostly operated like franchise, most workers are also owners, and it is not unusual to see them working 5 am until 10 pm, everyday.

"Strangely much of the material involves people standing around and multi-handling material on conveyor belts rather than doing the real function of a sorting facility (that is making choices therefore sorting)."

My guess is they are arranging the packages so that the bar code can be scanned easily. There seems to be a bar code on just one side and they don't have multi-directional automatic scanners like in the UPS video.

If the numbers add up there is vast potential to improve operations.

To check your thesis you need more data. Offer to buy tracking data from customers for a rebate, but don't say you need it to check a short thesis :-)

In terms of the amount of packing/sorting required, it's conceivable for merchants to pre-pack many items (so just need to attach printed label + invoice), or even for them to pre-sort the packages by provinces/cities, to save processing time.

One key aspect of the Singles day promotion is that the merchants prepare for days or even weeks for the event and it's them who drive which items get sold in vast volumes, by setting the discount.

I would echo some previous comments about a) Ali is just the middle man; b) logistic operations are big and efficient. But another factor is the fact that some merchants might not be reporting wholy correct numbers to Ali, i.e. when they say to Ali or the customer an item has been 'shipped', what they really mean might be that they have received an order and are in the process of preparing for it. Another possibility is that the merchant has 'shipped' the item to the warehouse of the logistics company, where delays are very likely to happen due to the huge strain on the system.

I had the impression that delays in shipping for up to 2 weeks are common and are tolerated by customers. After all the discounting is very significant.

Using analogies with foreign companies can lead to oversimplification. Alibaba is effectively both the eBay (Taobao) and Amazon (Tmall) of China. As many have pointed out, many shops on Taobao handle their own logistics, so the comparison to Amazon does not apply.

However, it is Alipay in particular that is mischaracterised by calling it an equivalent of Paypal. The Alipay app can be used to pay in grocery stores (for example in Suguo supermarkets), for taxis and many other things that have no relation to Alibaba. Unlike Paypal, Alipay also provides an escrow service. Funds in an Alipay account accrue interest at a slightly higher rate than in banks. I know of trading companies sometimes paying suppliers using Alipay because of its advantages vs. the slow, bureaucratic and awkward banking experience in mainland China. A comparison to Paypal is of no use in evaluating the limits of Alipay's business.

John, exaggerating Singles Day volume for promotional reasons is entirely possible, but doesn't make for a great short thesis. Consider QIHU, which has lied about its market share in every single press release for 5 years...claiming to touch hundreds of millions of users is impossible to verify and says something about the company's integrity, but not its profitability. (There have been other, valid reasons to short QIHU but that is hardly one of them).

BABA may overstate Singles Day a bit in its press releases but that does not call the financials into question.

John, like many of the posters have noted, Amazon doesn't seem like the right comparison, but more so ebay. It is not a retailer in any sense of the word. It is a capital light logistics company that has a marketplace matching buyers and sellers, analogous to priceline, expedia, and ebay. JD.com is the Amazon model and I would note is 1/2 as big as Amazon and growing triple digit.

For checks, I would start with the logistics partners. There are so many publicly traded, state owned, and 3rd party companies to tap into for information. And on alipay vs. paypal, I think its important to focus on the fact that alipay is ubiquitous, used offline and is the defacto standard for online payments. Tenpay and Baidu would be good places to start to look into Alipay.

Next take a look at JD.com. It is 1/2 as big as Amazon on a GMV basis already and is growing GMV 100%'ish so will be larger in probably 4-6 quarters. JD.com is everything Amazon is. They own the logistics network AND they own last mile delivery, so even more capital intensive than Amazon. And in addition to JD, Tencent would be a great place to start your checks given they have a large equity stake and provide traffic to JD thru wechat. How could JD.com be 1/2 as big as Amazon???

One thing that doesn't seem to be getting brought up at all, when looking at baba's scale, is that Tencent's user base is 2-3x as big as baba's. How does that occur with only 650m internet users? How could Tencent have 900m users? C-Trip and Qunar each have 200m'ish users...Maybe they are all lying...Or maybe there 1.4bn people in China and maybe the 650m number is off?

You have put together a thoughtful article but there are many places to look and dig. Why not start with ex-employees?

Because "guestimating" the variables is so imprecise, I personally think that the ONLY way to get a smoking gun on BABA is to have a "hidden camera type interview" similar to the circumstances set up on Lumber Liquidators factory ops in China. Essentially, there would be Chinese logistics/ops/accountants that would know the truth, if indeed they were faking the numbers.

I think part of the point may be that even if the numbers all true, how much more can it grow when the transaction volumes are already so high? If every person with internet access in China is already placing multiple orders, who else is left to expand to?

I've worked in the technology and e-commerce space for the last decade and follow technology and architecture pretty closely. One thing that hasn't been covered in your write-up is looking at the technology stack that would be necessary to support that many transactions per second.

At that scale there has to be a pretty significant data pipeline in place to move data around, reconcile transactions, etc. One interesting line from Square is this:

For every payment received there are "roughly 10 to 15 accounting entries required and the reconciliation system must therefore scale at one order of magnitude above that of processing, which already is very large.”

At an engineering level having the skills and practical experience handling that kind of volume at scale makes you part of a very, very select group with very, very high demand. One thing that I'm surprised at is how little is known around their technology stack, because, frankly, at that scale your infrastructure is custom-built. Meaning that you don't go pick up a switch or router off the shelf from a major vendor but instead you build them from parts.

It is odd that I haven't seen any overview of their technology architecture leak given their size and history. Given the amount of cross-pollination between engineering talent between China and Silicon Valley I don't think its just a cultural barrier. There are some articles but not as much as I would expect. Harder to find information on them than Google which has been fairly good about keeping things close to the vest.

Looking at metrics around the technology stack (bandwidth, servers, data centers, etc) may give you some additional dimensions to compare against Amazon. Everybody has to buy from Intel.

For example, a record amount of traffic and transactions occurred on Nov. 11, 2014, during Alibaba’s 11.11 Shopping Festival, which saw peak order creation volumes of 80,000 orders per second.

To get 11.11 orders to homes in farflung cities in a matter of days instead of weeks, SF Express, one of China’s leading shipping companies, will be flying 36 cargo aircraft capable of hauling 1,800 tons of packages daily.

Alipay said peak transaction-processing volume will reach 30,000 payments per second this year, compared with 15,000 during 11.11 last year.

When you consider Jack Ma's early career and the circumstances of how he came to "acquire" Alibaba from Yahoo, you should figure that the man is capable of just about anything.

On the other hand, the most likely explanation is that the merchants pre-package dozens or hundreds of the "most likely to sell" items, such that all they have to do to fulfill the orders is to stick on a shipping label.

I would suggest that you do a contest: In exchange for a chance to win a RMB100 Alipay gift card, ask people to send in their shipping information, such as the tracking number, date ordered, etc. Then, correlate the numbers with other available information. . .

Cannot help on the parcels, but in the online payment industry one transaction does not necessarily count as one payment. Instead, a transaction is referred to as any exchange of information on which a fee can be levied. So for example a real world credit card transaction can easily translate in a bundle of 5+ transactions from a payment provider perspective: check if credit card number exist, transmission of 3-digit security number, transmission of name, expiry date, amount, actual payment, confirmation of payment etc... - all depends on the fee model of the payment company.Don't know if this applies here, but it's a common reason for seemingly overstated tranaction counts.

John - is a "delivery" in China the same as the USA? In the USA you could say it is very much vertically integrated - Amazon staff process an order from "click buy" through to picking/packing/consignment, then FedEx/etc staff process the package from consignment through to the buyer's front door. There is only one break in the chain there. Maybe there are multiple breaks in China? Or maybe the chain is a different length - maybe they don't deliver to the buyer's front door? If their logistics chain is different, then the number of staff employed by each organisation (Amazon/FedEx/etc equivalents) will be different.

To prove up your thesis, I suggest you trace how a "click buy" from say the top 8 Alibaba retailers turns into a buyer unwrapping their parcel. It will either be vastly different to what happens with Amazon, or Alibaba is going to explode.

Alipay is widely used for transactions outside of Alibaba. From the prospectus: "For the 12 months ended June 30, 2014. Approximately 29.7% of Alipay’s total payment volume in the 12 months ended June 30, 2014 represented payments processed for our China retail marketplaces."

That said, Alipay IS the primary form of payment on Alibaba. From the Alibaba annual report: "In the 12 months ended March 31, 2015, 75% of GMV on our China retail marketplaces was settled through Alipay."

If we take the 278m deliveries and assume each required 1 payment transaction (I'll come back to this assumption later), then we'd have 278m Alipay transactions on Alibaba. If we assume Alipay's 75% share of Alibaba’s GMV also applies to the # of transactions, then Alipay accounted for 208.5m (278m X 75%) transactions on Alibaba. Furthermore, if Alibaba accounts for 29.7% of Alipay's transactions, then Alipay may have processed 702m (208.5m / 29.7%) transactions on Singles Day. But this 702m is well below your 1.2b transactions estimate. (And further, the 702m is probably high, I'll come back to this)

I think your 7 hours of peak transactions significantly overstates the # of transactions. There is huge volume at the very beginning of the day as customers try to take advantage of limited quantity deals or time-expiring deals. (Think midnight crowds outside of Best Buy on Black Friday) The peak # of transactions almost certainly occurs in the first few minutes.

On Singles Day, Alibaba and/or its employees post updates of the cumulative GMV for the day. Alibaba reportedly generated 57.1b RMB of GMV on Singles Day. The #s I’ve seen:- 1b RMB GMB in the first 2 minutes- 10b RMB GMV in the first 38 minutes- 20b RMB GMV by around 7am- 30b RMB by around 11am- 40b RMB by around 4pm- 50b RMB around 9pm- remaining 7.1b RMB of GMV was generated from 9pm to midnight

A few further calculations:- if we assume the "peak" 2.85m Alipay transactions per minute applies to the first 38 minutes and then scale the number of transactions/minute in line with Alibaba's GMV per minute, then on my calculations, Alipay processed 618m transactions

- if I assume the "peak" 2.85m Alipay transactions per minute only applies to the first 2 minutes and then scale the # of transactions/minute in line with Alibaba's GMV per minute, then on my calculations, Alipay processed 325m transactions

Unfortunately the quote is unclear on what "peak of the event" applies to, but the range of Alipay transactions could be 325-618m if “peak” refers to 1) the first 2 minutes; or 2) the first 38 minutes

Getting back to the 1 Alibaba delivery = 1 Alipay transaction assumption. If Alibaba represents 29.7% of Alipay transactions (the actual statement is that Alibaba represents 29.7% of Alipay total payment volume, but let's assume payment volume per transaction are similar on and off Alibaba), then the 325-618m Alipay transactions implies 96m to 183m Alibaba transactions.

Why does this range not match the 278m deliveries number? My guess is that many of the Alipay "transactions" on Alibaba represent a payment for a basket of items. This basket can consist of items from different sellers on Alibaba's platform. As a result, 1 Alipay transaction could result in more than one delivery as each of the merchants would arrange delivery to the same end customer. The 96m to 183m range for # of transactions on Alibaba implies that the range of deliveries per transaction is between 1.2-2.9. In other words, each order may consist of items from between 1.2 to 2.9 different sellers on Alibaba.

Alibaba almost outsources all its logistics. I doubt they really own large warehouse coz only a relatively new business, aka tmall grocery, carries inventory. In that sense, it's more like ebay. Btw JD.com resembles Amazon much more. The online shopping situation is a bit different from the experiences you might have in western countries where a lot of brick and mortal stores have built their own websites. In China, online shopping is more centralized on taobao, tmall, jd, and yihaodian. Tmall provides infrastructure for big brands to open their online stores.

Besides, Alipay is used more frequently than you might think. The scope of usage includes payments in physical convenient stores, most cabs, local restaurants, movie theaters etc. The offline usage is most likely limited within only large cities. Tenpay is a formidable competitor.

I want to comment on just a specific part of your analysis - extrapolating the peak minute trxns to the daily trxns. The figure refers to Singles Day, and there is more than a reasonable chance that the 7-hour thumb rule cited by you may breakdown here, simply because the peak just ends up being that much higher. Such high numbers can usual disrupt the entire trxn distribution set for the day - consider this, by this rationale, the 278 mm trxns, already a feat beyond even Alibaba's expectations, would be achieved in a bare 100 minutes or so.

I think above Anonymous commentator made excellent points. Although I'm frequently on the shorting side of BABA, it mainly was because the growth should slow down significantly. The golden time has already passed.

Some personal experiences as a mainlander. Indeed Taobao and Alipay are used ten times more frequent than one thinks, especially if he is from Europe or America. The craziness of commercial real estate has driven most price sensitive purchases online, including buying apartment, groceries, in-call massage (not the exotic), anything you can think of. Alipay is ubiquitous. It connects almost all shopping malls, most restaurants, college dinning halls, utilities, railway stations and taxi.

Next on Alibaba's business model. Alibaba is not like Amazon, it doesn't do any of the logistics. The business model is more selling traffic(ads, search results, promotions), data services, payment processing, and infrastructure to mom-papa stores online, a light capital service or internet companies. The model had a good time as online shopping burgeon and a much larger market for almost all offline store owners. The flaw of the model is essentially Alibaba is milking small business owner(sellers) to feed customers(buyers). If someone successfully builds a brand on Alibaba, he is very likely move out of it and build his own online storefront or maintain the storefront on Alibaba, but not likely to put a lot marketing budget on it. Alibaba will still make a ton of money as there is always people want to open business as long as Alibaba is a traffic hub.

Third on the Singles event. It is almost certain on 11.11 you will get the lowest price through the year. It works as Alibaba puts a set of strict pricing rules on sellers. So what's reasonable for customers is they will make a lot more purchases on that day to get guaranteed best price. For sellers, the huge traffic usually offsets the reduced margin. This is observable by looking at monthly GMVs. 11.11 diverted a lot of GMV from October and December.

Fourth on US peers. I have lived in US for more than 5 years. I say Black Friday and Cyber Monday have become more tradition than real discount festival. I wouldn't feel surprised if all of sudden everyone ditches Black Friday shopping as a lot of retails don't offer same discount as their Chinese peers.

Some data crunching:1. 278 million orders, GMV is 57.1b RMB< so 205RMB/oder. It is not very outrageous if you are told electronics are the most popular category.

2. 278 million orders, 586 million packages for the whole industry. 2.1 package for each order. Buyers usually have multiple items from different sellers.

3. All the packages are processed in about 7-10 days, peak is around 100 million package. According to industry statistics, on average daily processing is 33.09 million package. Only look at peak speed, 1.4 million employees in total for the delivery network, on average each deliver 71 packages a day on peak. Not too ridiculous.

4. Alipay's peak would probably last less than a few minutes, maybe is the processing speed at first second. Above anonymous commentator's 600m transactions make more sense. If we used that, average value per transaction is 57.1b/600m=95rmb or $15. Not outrageous.

5. Alipay has excellent infrastructure, but may not make a good comparison to Visa as Alipay involves simpler transactions. When on 11.11, everyone has already beefed up their Alipay wallet instead of routing through multiple banks/intermediaries like Visa purchases. Even that, Alipay said goodbye to Oracle and migrated to OceanDB. If we could look at more technical details of Oracle DB and OceanDB, we could have sneak peak at Alipay's scale.

As many commentators have said before, using Amazon as the model is barking at the wrong tree. BABA is a middle man who has perfected the OTO model. Pretty much all its logistics is outsourced.

As for the growth potential, we have about 1 billion mobile phone users in China today, half of them being smart phone users, i.e. phones that can access the internet. There are also between 150 and 200 million PC connected to the internet, so the figure of 650 to 700 million internet users makes sense. That leaves another 500 million mobile phone users who will progressively convert to smart phones and also be able to access the internet. Therefore, in 3 to 5 years from now, we should end up with more than 1 billion internet users that will continue to boost BABA's GMV numbers even if BABA's market share drops from 75% today to say 60% in 3 years time... Also all smart phone users do not necessarily shop online yet. If of the 500 million smart phone users only half have done one transaction online in the last 12 months, that leaves room for doubling the number of transactions as more and more users do actually make one transaction online, plus the doubling of users over time. I would not be surprised to see BABA's GMV at least doubling over the next 3 years and perhaps even quadrupling over the next 5 years... One trillion dollars in 5 year from now...

What’s important to note is that Alibaba’s platforms merely facilitate the transactions. They manage the marketplace and charge a small commission, but don’t hold – or sell – any merchandise themselves.(they dont make any shipping)

EBAY doesn't this kind of business but Amazon doesn't

Amazon has 2 retail business:1st party, they sell their own items and they make the shipping (inventory risk)3rd party, they sell 3rd party items but they make the shipping for them (no inventory risk)

Yes they have expensive valuation (AMZN or BABA) but you have to understand the business model before to extrapolate any numbers and searching frauds...

This question is absolutely with no merits. The question that should be asked is: Do you trust Jack Ma? and if yes then how much does he know about his company?The answer is simple: Jack Ma is one of the most ethical and righteous person on this planet and i think he knows what is going on pretty well in his company. So saying that they fake their numbers just because you cannot understand how it works and how big they are is ludicrous. Please short Alibaba, you deserve to lose a lot of money!

Not just 'emojis' but I'm surprised no one brought up buying other digital items - songs, movies, videos, etc. Surely some singles would want to watch a movie or send music to someone they like, and especially the couples.

So I asked: How would you test this. And I got some interesting answers - some of which might require a little work to pan out. However some answers wound up looking silly. If you think for instance that a substantial proportion of the transactions are low-value emoji then the remaining transactions wind up with implausibly high average value.

Spun this around for a bit in my head last night and would suggest that those numbers become much more reasonable if Alibaba is in large part a trading rather than an eCommerce platform. Component parts and commodities trading and hedging; financial instruments and currency exchange; and gambling.

Some Google searches turn up 'smoke':

http://shanghaiist.com/2014/06/26/tencent-alibaba-world-cup-bets.php

Tencent, Alibaba help rake in $642 million in World Cup bets despite anti-gambling laws

Remember where it came from? 1688.So another profits center:A. I knew a lot of manufacturers paid 20K - 50K RMB consultancy fees/year to get industry/trends reports from Ali.

B. I knew a lot of small shop-owners must pay large amount of ads/promo fee to Tmall/Taobao/1688.

I didn't read the IPO specs or annual reports as I foresee there is no buying opportunity so far, maybe in 2018. Need to check the latest annual report for A and B profits.

The magic side of Ali is that they don't have to do physical logistics, and that's why it can grow so fast. But this is the weakest point so far. JD is the same kind of Amazon.

Alipay won't grow much in China, and it doesn't belong to Alibaba. The regulators had laws to restrict it already. Possible it can extend to SE Asia or any emerging markets.

The specialization shopping site will be the trend, and Taobao won't last long as the consumers grow mature. Should compare profits from Taobao and Tmall (can last longer).BTW, I heard that Ali won't take many new stuffs this year(from school career talk).

China is a very different economic environment. Unskilled and semi-skilled labor is abundant and extremely cheap. Sophisticated automation equipment is expensive and difficult to keep running in China.

Businesses in China take a very different approach to peak capacity than a business like Amazon. Nail shops, hair salons, real estate agencies, and restaurants will have a staff sized for their physical infrastructure, which is their primary cost, e.g. a nail shop with 6 work stations will have a staff of 6 all day long (and often all night long) independent of demand. The staff often lives upstairs and makes a very meager net wage. It is interesting to watch how the staff transfers tasks to this business downtime.

It is not directly relevant to your questions, but I find it very interesting to see how small restaurants manage space, their largest expense. Many small restaurants put as much space as possible into the dining area. Many will not have the space to operated the kitchen and clean tableware at the same time, so at peak they will bus tables to the sidewalk and substitute a large inventory of tableware for the space required to clean it, which will happen at off-peak. And this is not in some rural province, you can see this in central Shanghai. These are simply rational responses to different economic and regulatory conditions.

Logistics can be unbelievably different. Electric scooters are zipping around everywhere with giant bundles of packages dubiously attached to the scooter for delivery. If you spend some time at the loading dock of a commercial building there will be a never ending stream of guys on scooters delivering packages. For larger deliveries, a well used van might show up, often with the wife and young child in tow, and the ubiquitous folding blue cart will come out of the van and a larger delivery will be made. And ever so occasionally, a high cube might actually show up and back up to the dock for a very large delivery. It is truly astounding how many people are employed in logistics.

Indeed, the technology is very primitive. The sidewalks in front of the delivery services are littered with packages. Trucks drive up and their contents are thrown out onto the sidewalk. But keep in mind that China developed a nuclear capability not with fancy electronic computers but with giant roomfulls of human computers with abacuses. What would you do if fancy material handling systems were expensive and difficult to maintain in your environment (and hence failure prone) and that unskilled or semi-skilled labor was cheap and you have the economic power to get them to work 18 hour days at peak load?

Your question about the possibility of the statistics is interesting, but to answer it well you need to have a better understanding of how China actually operates. The implicit assumption that Alibaba should (or must) operate like Amazon is flawed. And once you understand how logistics works, I think you will find it (at least in principle) easy to measure.

The more interesting question of how much more this can grow requires even more insight into the daily lives of ordinary Chinese consumers and how their demographics and habits are evolving, and why. And right now whats driving that is mobile. And that answers your question about Alipay.

Peak capacity:My understanding from my over 300+ purchases from Taobao is that none of them comes from Alibaba itself. Marketplace is the dominant part. Also I experienced 11.11 inside China in my previous job. At my office in Shenzhen, every floor's reception desks (we took multiple floors of the building) were filled with packages from 11.11 orders until the end of November. This is the major reason why capacity is not a good short thesis because how Chinese accepts and are used to delays at times like this is unimagined in western culture. Of course if you have an option to pay much less in Amazon, it still makes sense to wait for a month for let's say, a gift you prepare for Christmas.

Logistics:Merchants and logistics companies in China seldom make large capital investments in order to save fixed costs. Wages for delivery boys in the rural areas are still remarkably cheap. Try to quote for delivery from Zhongtong versus that of UPS you can see the price difference is huge. (To be fair, Chinese "express courier" are no express)

Taobao business:In my network I know very few shops actually use Tmall's full service solution (warehouse, logistics, branding, site setup and monitoring) but many do pay for advertising. So without looking at their 20-F I guess the main revenue for Taobao is therefore advertising fees and transaction-based commissions. They created a market place where hundreds of thousands of merchants compete for the 1st place in search. A search on "torch" in Taobao returns 430k results while there were only around 6k at ebay.The fake goods story didn't hurt Alibaba much because buyers already know they are not buying the same things from department stores. Buying stuff tagged with big names (e.g. Samsung batteries, Prada wallet, Sealy mattress) from Taobao is a newbie move. For me I rather buy local start-up brands that put emphasis on product specs and durability (keywords are instead: "1000+ recharge cycles", "top layer full grain leather" and "high carbon spring"). 10 years ago no China brand invested in quality because there was no channel for end-customers review. Now they have and this is a big change for an average person's life as the everyday products' quality improves.

Alipay:To understand the stretch of Alipay let me introduce Dianping and Meituan, the largest group deals sites in China. Think of them as Groupon and Yelp combined that, in my opinion, has a better business model than otherwise separated because they encourage repeated purchases. Using these apps to look for restaurants or services will return both deals (immediately usable) and the customers' reviews which is pretty awesome to the user. Alipay can be used to pay for purchases made in both apps. In fact most Chinese apps and e-commerce sites use Alipay as payment solution. Some stores outside China started to allow Alipay as a payment method.

Overall:As a Hongkonger I have every reason to hate China. But for Alibaba, there isn't yet another way for an average person to start their own shop and acquire customers as easy as in Taobao. Even if Alibaba bloated the figures it's still a sound business. Customer experience is absurd in China both in shops and in websites but they don't care about it more than price and product, this is where Taobao comes in.Financial wise, I believe Jack Ma and his team are too damn smart to be hacked. I met a guy at Tencent who is already much smarter than me, and he still wishes he could join Alibaba. Think through how the business has been organized and expanded and you may be convinced that it is not worth the effort to short it.

You said Alibaba was a combination of Amazon (retailer) and eBay (platform for retailers), but then your comparison is only to Amazon. What if you assume Alibaba is 90% eBay and 10% Amazon. You end up with huge numbers of transactions, but most don't require much effort by Alibaba.

John Hempton said...Alibaba has its own delivery network which it owns a stake in and provides software for. That is well documented on their IR site.

It delivers more than UPS and FEDEX combined.

Maybe Amazon is not the right comparable - but the question then is can we verify infrastructure to match UPS and Fedex exists?

J

September 16, 2015 at 5:47 PM

This is actually quite timely as I was just in China speaking with a service provider that offers logistic solutions for the likes of Alibaba, JD.com, Taobao etc (banking side). Outsourcing is a very common theme in China and this occurs on multiple levels from warehousing, management of warehousing, workers in warehousing, logistic trucking companies and finally delivery person at your door. What I can confirm is this particular service provider has grown exponentially to meet the demands from these online retailers. The issue they are facing right now is they can’t expand fast enough to keep pace with client demand (online retail sales growth vs. physical construction of logistics infrastructure – acquiring land, government approvals, design, constructions). I can’t disclose their numbers but suffice to say they are growing rapidly and so are their main competitors in this market.

One thing to note and you have shown this quite well with your photos, many existing “logistic centres” are nothing more than a warehouse with couple of crates. The above mentioned providers are what you would call more westernised in terms of their logistics setup and this “advanced setup” is growing in the Chinese market.

But as an ex-CPA at Big 6 (then Big 5, 4..) I can not understand one thing.

You ask: " So I asked: How would you test this."

Why not order something yourself?

If you take a look at www.aliexpress.com it can't be easier.Choose shops that look different, see what happens. And think through all the process along - how put smth into "shopping basket", how purchases are grouped, presented, how shipping calculated, how paid .. how delivered..

Eg why for most goods "shipping is free" with China Post. And how this works out if the goods cost only pennies anyway.

See how the tracking works. how you get the number, how is the "progress" on tracking websites.

And - how the packages look like when you get them!

I can confirm, they ABSOLUTELY look nothing like from Amazon. Never ever.

Never have I received anything from Amazon that is wrapped in an old chinese newspaper! (that was a bag of tea)

And - when you actually receive the goods from mail, you have to log in and confirm receipt.

ONLY AFTER THAT the funds are transferred to the poor merchant who is trying his-her best in English, in some small (million-inhabitant) town, the name of which most people have never heard of.

Shipping overseas can take up to 60 days! Who has all the money until then? Good question. a simple multiplication excercise. And do all payment transactions have to be at the very millisecond the pay button is clicked? If you order you'll see they are "being verified" sometimes for days, and that's off peak period.

And eg if you look at feedback people leave, you'll see other interesting facts, that Russian is the second language for commenting on goods.. and they often recently comment that goods are received in less than a week.

Conclusion - good fieldwork is what is missing from this otherwise great article!

just my 5 c

Best regards

Rainer / Estonia

PS. my average order from Amazon is at least 100, perhaps 200+ euros. My average order from aliexpress is <10 USD.

Very interesting read. On the Alipay peak transaction volume subject, I think you are way overestimating the length of peak time. 7 hours of relatively stable peak time may be reasonable on a normal day, but on a fanatic sales day like the Singles Day, peak time is shortened to a much shorter period of time. Read again what the article said: "At the peak of the event, 2.85 million transactions were processed every minute by Alipay." So if Alibaba had 5.7 million transactions in two minutes, that statement is technically true. And having 5.7 million transactions in two minutes is very different from having 1.2 billion transactions in 7 hours, which I agree with you is outrageous. The analogy here would be on Black Fridays here in the US, many stores like Walmart or Best Buy open at midnight and you have people camp out and wait in line. So shortly after midnight - maybe 12:10 - 12:15, you will have a peak transaction volume as all those people start to check out. The same thing happens on Taobao/Tmall on Singles Day: many sales events start on a specific time, let's say 9 pm. So it's not unrealistic that you have a massive of transactions concentrated in the two minutes from 9:01 to 9:03.

Having lived in China for 4 years, everything people are saying about Alibaba being a platform that facilitates transactions rather than an inventory-focused Amazon-like retailer is correct. They say that their top 14 strategic partners employ 1.4mm employees and that is only the top 14. If UPS has almost half a million employees, it is easy to see how the entire Chinese logistics industry has triple or quadruple that number. It is important to take into account that Chinese labor has historically been so low cost that automation is generally much lower in all industries and so there is significantly more labor used in logistics/distribution than you would see in developed countries, which is exemplified by the picture you posted making the system seem so radically unsophisticated...that's because it is!

The key piece to verifying the puzzle you pose about Alipay/Alibaba is in this Worldpay press release: http://www.worldpay.com/sites/default/files/china-singles-day-2014-spending-soars.pdf

In it they state a few key stats that can help us put the entire picture together, assuming Worldpay (which is about to go public) isn't lying. They say that their average user made 5.3 purchases on Singles Day and spent an average of 95 pounds in total. Their number of transactions increased 455% versus their average day.

First, if there were 278mm Singles Day deliveries and each user purchased an average of 5.3 items, that gets us to 52.5mm shoppers on Alibaba's platforms on that day. In other words, only 8.1% of Chinese internet users and 3.8% of the total Chinese population used Alibaba on Singles Day. Not exactly a staggeringly high number. If you think the Chinese internet will expand to penetration rates much higher than today (very likely), then it isn't unlikely that you could see 6-7% of the entire population using the platform. I don't think anyone would call this a stretch. So the answer to the question 'how much can Alibaba grow?'is 'by multiples of its current revenues and earnings but probably not by 5x-10x'. One thing people miss out on when thinking about Chinese internet growth is that China never had a well developed retail industry and the people did not have bricks-and-mortar shopping habits developed over decades. In many ways, China skipped this step and jumped straight into internet retail as its period of rapid growth started after the rise of internet infrastructure. Many people assume China's internet population has the same growth characteristics as the US with added growth because of the emerging market aspect, but this simply isn't true.

Second, Alipay averages 80mm transactions per day. Assuming that increased by the 455% that Worldpay cited, you get to 364mm transactions. That is an average of 252,778 per minute. The peak transaction volume was 2.85mm, or 11.3x the average, which doesn't seem crazy. I'm sure that at 11:11 AM/PM they do some additional aggressive discounting making volume spike to that level in a very concentrated time period, so it isn't as simple as multiplying 2.85m x 60 x 4 or 6.

Third, we can further triangulate Alibaba's numbers through the Worldpay press release by using sales numbers. Sales were $9bn for Alibaba on Singles Day. With 364mm transactions, that equates to $24.73/transaction. The average user purchased 5.3 items and therefore spent ~$131 per person. In GBP terms (using Singles Day's USD/GBP exchange rate), users spent an average total of 82.32 pounds versus Worldpay's reported 95 pounds per user. Alternatively, you could say that $9bn in sales divided by 278mm singles day deliveries is $32.37 per transaction, not too dramatically far off from the $24.73 cited above and equal to 107.78 pounds total per person.

These numbers tie together too well and make the premise that Alibaba is fabricating its numbers unlikely. There are additional complications for Alibaba itself in its vendors sending false information as many people noted here as well.

Just to be clear, I'm not an investor and wouldn't ever invest in such a company with exactly zero shareholder protections and terrible corporate governance. This is the real issue and not the scalability of the company, how big it can get, and whether or not they are exaggerating their numbers.

I think a much more interesting subject to focus on is real verifiable cash flow ... try to reconcile the free cash flow with reported earnings AND what exactly WE own as shareholders, would someone please shed some light on the black box of its corporate structure ..

John, nice work. My first posts on the Alibaba fraud were back in November of 2104, on both my blog, Deep-Throat-IPO and Laura Logan's page on CBS News. John Laing at Barron's , an avid reader of my blog wrote a nice cover story on same last week. Best....DT

Three ways to back-check Alibaba's numbers:1. Do Alibaba's sales each quarter change as if they are influenced by the Chinese retail economy as a whole?2. Are Taobao and Tmall noticeable in their sales data (and maybe they're still too small to matter)?3. Pick a few representative locations (urban, rural, etc...) and monitor deliveries on a "Regular" day, vs. the normal shipping time lag after singles day. Alternatively, interview/poll a sample of their shoppers and vendors and see if the numbers are in the ballpark with Alibaba's numbers.

Three reasons not to expect 500% growth:1. Competition is increasing for them, not decreasing. There is no monopoly model, other than size efficiencies and convenience related to Alipay.2. Their network effects appear limited to primarily China. As China develops and labor becomes more expensive, making many of Alibaba's goods relatively more expensive, what is their strategy for expanding to other countries in terms of the sellers? Do they make more money from having more sellers, or having more buyers?3. The Chinese economy is already overheatedly inefficient from malinvestment and more correction is coming.

Three reasons to expect 500% growth:1. As China develops, more internet users and more disposable cash. Still plenty of population to get online and start selling/shopping, although maybe not 5x enough.2. Even with corrections and slowdown, long-term China still has a lot of room for catch-up growth.3. Alibaba over time, while still sourcing in China, will sell internationally, tapping much larger purchasing pools. This requires shipping/customs changes for them, but it's within the realm of possibility,especially with free trade movements and their ability to contract to outside delivery providers.

Some of the above aren't as easy to test as they are to get opinions on. I lean towards the not-500% model myself, primarily for competition and economic reasons, which may not be fast enough to sustain a short position.

John, A couple quick thoughts: First these are consolidated group numbers from a Chinese company. I would be surprised if they were false numbers but the reality is that there is a difference between Western and Asian ways of looking at things.

Consideration 1: Transactions... what is THEIR definition of a transaction? Most of the numbers probably came from the hundreds of millions of users of Alipay. Alipay needs to be looked at vs a significant % of the sum (Visa + MC + Amex + PayPal + Apple Pay + ATM purchases). Add to this the three main B to C shopping sites (Tmall, Taobao and Juhuasuan) a transaction could include the number of clicks vs number of sales completed.

Consideration 2: Received and Shipped. Given 1,000,000 orders received and 200,000 shipped yields 1,200,000 received and shipped. Step 2 of that 1M received, say on Tmall, 700,000 were transacted through Alipay that is another 700K received and 700K shipped (completed). As such the 200,000 physical shipments could be reported as 2.6M receipts and shipments.

Consideration 3: Are the employment numbers only for the group HQ level or do they include all of the sub business?

Bottom line is like any business start with the money and follow it.

Alibaba.com is B2B there are reportedly 100's of thousands of sellers paying a, guesstimate, of 0-$10k annually for membership and add ons. That is Alibaba group revenue source from that entity.

B2C sites - Don't try to compare to Amazon as you would be trying to compare to Amazon Prime not normal Amazon where you are buying directly from the seller who does the fulfillment. eBay is closer so you look at what % do the Alibaba sites make per transaction? 5-10%? What is the transaction value for the three shopping entities?

Alipay - There are no fees to the user but what are the transaction fees? 3%? so again need to come up with what is their annual transaction rate and that is this revenue stream.

Does the sum of that make a real business? Probably, but, as you are obviously doing, you need to check the facts to understand what is really going on.

Of course, it is most desirable to collect granular facts, that are possible to gather, and then to see if they fly in the face of Alibaba's claims.

But given the level of dominance suggested by the reported figures, some questions come to my mind: - what makes Alibaba dominate the Chinese market in such a dramatic manner (if Alibaba is more like eBay, may be first mover advantage got them their dramatic dominance, but if they are sufficiently like Amazon, then I wonder what their claim to dominance is) - worth studying the number two in the industry - how large, growing faster or slower than Alibaba, comparing metrics - Comparing them to Flipkart and Amazon in India might be interesting too. - Both Flipkart and Amazon are market place models (quite like Alibaba it appears) but both of them seem to believe that they need to do at least a part of the warehousing/sorting themselves (Fulfilled by Amazon style). Hard to fake those numbers - in an outsourced model, it is easier to claim that your amorphous army is omnipresent. - And it is not clear as to who the winner will be. There are others beyond Flipkart and Amazon and those others are still fighting to be the eventual winners. - So what is so different about China's market that lends itself to extreme dominance by one company in an otherwise incredibly competitive space

This is a great example of an analyst who has gone through tons of information but still has no idea what he is talking about because he has never personally assessed the situation. Here are his fatally flawed assumptions.

1) Purchasing Behavior on Taobao is similar to Amazon.In the USA, Amazon is used for deals, gifts, and unique purchases. However US consumers would never think of purchasing mundane items like napkins, toilet paper, or cheap items unless they are in bulk. The shipping costs just offsets the costs and people want it now, not next week.In China, people buy EVERYTHING on Taobao. Everything. Even all of these cheap commodity items can be bought on Taobao. The reason they buy it on Taobao is because its frequently cheaper than the store, there is wider selection online, shipping is fast (usually within 3 days), and frequently shipping is free or really cheap. Everything is in place to make online shopping for everyday products economical for everyone.

2) Taobao holds inventory and fulfills orders like Amazon.This is just not the case. While Taobao does offer fulfillment, it is largely a marketplace. They don't require the large logistics network that Amazon does.

3) Delivery companies in China operate similarly to those in the USA.When I read this article and they start estimating the number of delivery trucks needed by the Chinese logistics suppliers, I just laugh to myself. I don't think it's even on the authors radar that electric bikes exist, much less how much you can fit on a single bike. Yes, they have trucks, but they just haul stuff between distribution points. The actual delivery happens on deliveries bikes which anyone who has even vacationed through China for a few days has certainly seen. One bike could be packed to carry 50-70 packages for just as many customers. Also the delivery bikes don't get caught up in traffic like trucks do, stop lights are optional, and they can pull up to the very door of the building and park unlike any automobiles can.

So to boil this down to metrics, the key differences between US and China based delivery companies is 1) population density 2) delivery efficiency (i.e. number of packages that can be delivered by 1 employee per hour) 3) the volume of parcels and 4) the overhead. For Chinese companies, the first three metrics (pop density, delivery efficiency, volume) is much higher in China while the overhead is much lower. This is a HUGE oversight in this article.

4) Only consumers are purchasing onlineA HUGE mistake this guy makes is assuming that all of Tabao's orders are B2C when there is a ton of B2B. In reality, almost all of the small and medium businesses purchase a large amount of supplies and products online. Taobao offers a much wider selection at better prices than can be had through wholesalers and representatives. The amount of B2B purchases on Taobao is MASSIVE.

Are the numbers 100% accurate? I don't know, but there are so many holes in his comparisons that you could drive a truck through. He just doesn't understand the China market.

Bedford's Law (Law of first Digits) Consider looking at the numbers (financial statements) with Benford's Law. (Wikipedia is a great starting explanation)....

In short, in natural systems, 1 is the first digit 30.1% of the time; 2 is first 17.6%;.... 9 is first 4.6% of the time.

In places where people are cooking the books they typically fail to cook them properly. (That is to say there are too many made up numbers starting with 7, 8 or 9.) This can be used to check for "areas of interest" in expense reporting. This has been proven to work in company Financial Statements or in elections results in third world countries. (populations of people are natural and the dictator faking results has two make election numbers starting with 7,8,or 9 and not enough starting with 1.) One of the advantages to this is that it can be very fast, but all data is not natural.

The emergent theme in this discussion is "I've not read the filings but...". Filings and selected correspondence are available at SEC.gov. I've read every word of every filing and posted my thoughts on deep-throat-IPO.blogspot.com. Investing is indeed very hard work.

$9 billion in 278 million orders equates to about $30 per order. Others have pointed out that orders are not fulfilled by Alibaba. It is also likely that some of the purchases are online books, music, computer games, and videos so there is no physical delivery. Maybe online purchase of travel tickets? With a $30 average, the odds are that the average package size is small and the physical package count is much less than 278 Million - regardless of who is delivering.

That said - China is still a poor country, I suggest that the limit of self indulgent purchases for Singles Day is going to be about double the current $9 Billion - and then only when incomes double.

It might still be a fraud. 278 Million is a lot of orders in one day for one portal.

The authors/interviewer has good questions, but is short of both business model of Albaba and qualitative skills, plus lack of time for quantitative calculations. I am sorry for being blunt:

1) Albaba business model does not include giant own warehouse and not hire many delivery staffs, because it is a flea market where millions of sellers arrange delviery with buyers. It has 1.4 M people as its delviery partners across China.

2) Quantitatively, based on the data the interviewer provided in the article, we can see:

a) the annual average of deliveries/staff/day (if all staff participate in delviery and working 300 days/yr) is over 35 for UPS and below 21 for Albaba delviery partners). Given UPS have likely higher percentage of overhead and less working days than Chinese couriers, the effecieincy of UPS is even more superior than Albaba's partners. This outcome defeats the author's statement.

b) the peak handling capacity per day per handler is 462 for Amazon and less than 200 for Albaba partners. In fact, Albaba partners often have delay on Single Day which further decrease their delivery number per staff on the peak day.

c) For the payment transactions, the author's assumption of 7 hours of leads to average transaction during Single Day is less than 662,000 per min vs. 840,000 for VISA, if the Single Day lasted only 7 hours. The 2.85 million per min is likely a very short period and irrelevent to his argument.

d) additionally from BBC data, order size is less than $34 each (RMB200). Given report of the average spending that day per user is over RMB1,000/person, ach user likely have 4-5 deliveries,which makes the participatants of the Single Day is less than 12% of Albaba users. It sound reasonable but the author may not know it.

Albaba data actually looks rational (I am not saying true or false). Albaba is not quantittively as efficient as Amazon, UPS or VISA, but its business model have mades it successful in money-making.

For interviewees, you neeed to decide if it is poltically wise to state so blunt as me or on the oposite sides even work for this interviewer.

I agree with "J-T": "This is a great example of an analyst who has gone through tons of information but still has no idea what he is talking about because he has never personally assessed the situation. Here are his fatally flawed assumptions."

Hi John,Here is a logistics angle which you can explore:Alibaba's partners have 100,000 stations which deliver 8600 MM packages in a year. This translates to 230 packages per delivery station on normal days. Have excluded Single's day.

230 seems to be a very low number per delivery station. One lady (from your example) could pack 230 orders in about 4 hours.

For Single's day, to maintain the same delivery schedule, assuming enough spare capacity in the delivery stations, each delivery station would have to clear 2800 packages in a day. In absence of spare capacity, the delivery schedule would have to increase.

So 12 shifts (2800/230) are required to clear the packages. This means 12 times the present workers are need to work.

Alternately, the delivery schedule would increase to 12 times. Assuming current schedule of 3 days, this would increase delivery schedule go 36 days which is unacceptable from a customer's standpoint.

Let's assume a hybrid. Delivery stations run at 75% capacity (space to store goods). So each delivery station could store 288 packages in a day. If this cleared at 4 times the average rate. It would come to 1150 packages a day. This would increase delivery time to 7.3 days from 3 days.

This looks like an acceptable number. This is assuming all sellers have the required inventory in place. If that is not the case, this would further increase delivery schedule.

Lots of discussion on Baba GMV here. The main points I'd make or emphasize are:

- Per SEC filings, much of Alibaba's "GMV" is settled outside the platform. They refused to disclose the amounts. The site operates much more like a Craig's List or Yellow Pages. Unfortunately, it sports an Amazon valuation.

- The bulk of the transaction value is not "retail". It's comprised of financial products, industrial goods, real estate and distressed assets.

A very significant part of GMV comes from tier 1 and tier 2 cities. These are VERY densely packed places. Rural is growing, but off a small base. E-commerce is still mostly a big city phenomenon, despite articles you see now about rural growth.

Often, entire tower blocks will have a delivery center where people can go pick up packages. I'm talking about a tower block that might have 2000 people, with one delivery point. You do not see that in the U.S., outside of maybe NYC.

Packages are delivered often on ridiculously overloaded electric bikes or scooters (purposely modified to be delivery vehicles). These are much cheaper and nimbler than trucks.

I think the comparison to UPS/FDX is misplaced. Although the DCs might be significantly less efficient than U.S. comps, the actual last mile may be significantly more efficient.

I've read that Alibaba's delivery network has more than 1.5 million employees. That seems logical and about right.

1. How many items per week do you order online?2. How many items per week do you order from Alibaba?3. How many items are delivered (physically) versus delivered digitally (books, music, etc.)?4. How long does it normally take for the physically shipped items to arrive?4. Please answer the same 4 questions, except for Singles Day only?

Or you can simply use deductive reasoning, as follows:

1. People who have something to gain financially from cheating will be tempted to do so.2. People who are tempted to do so will normally be stopped by potential sanctions applicable to cheaters who are caught.3. In China, there are very few sanctions for cheaters who are politically or otherwise connected.4. If a cheater is basically immune from sanctions for cheating, he will almost certainly cheat.5. Alibaba is politically and otherwise connected in China to the elites; Alibaba also will gain financially from cheating (higher stock price).6. Alibaba will almost certainly cheat.

Who was Alibaba? The most famous thief of world literature... Who managed to get the largest IPO but not in Hong Kong because the governance requirements were too stringent (and after stealing Yahoo of their chunk of Alipay)? Alibaba...

That was sufficient for me to stay away but this is definitely not evidence for a short. Curious to see what comes out of your research.

I suggest you to read more about the business mode of Taobao (and Tmall). Because obviously you know nothing about it other than "an online shop". The biggest problem with your analysis, as pointed by many before, is that they don't process any parcel. Someone asked if Taobao is eBay+Amazon, then how big is the eBay part? Well from the logistic perspective, it is 100%. Taobao(Tmall) is basically a platform, on which people (or companies) open their own shops and sell, pack and ship their goods. And you must experience Chinese logistic today. There are more than 1,500,000 people in the field, and they are using tricycles to deliver (Nevertheless there are still complains that they received their item after a month of Singles day). Go to a Chinese university (in a bigger city especially) and see how the "express" work. I think one or two tricycles would deliver more in an afternoon there than a UPS truck in a whole day. The universities may be an extreme example (where young students are gathered the most) yet just bear in your mind how dense are the cities in China are (and how many people there in total). Therefore logistic can be far more efficient, in term of number of parcels delivered.Hire a Chinese student and let her/him guide you through Taobao and explain how Taobao works. (Consider to hire me! ;p)And just one more point how you can make mistakes while trying to understand others by your imagination. "On Singles Day you go out and try to find a beloved", you mentioned. Yet today in Chinese internet culture... No sir. It's a day for you to cry alone in your home. Or at most go out celebrate your single status (with your friends). Your interpretation is truly FRESH to me, to everyone in China I guess.

KZ (aka Jack?...is that you?)......that's a great post! You are correct, 1.5 million people riding around on tricycles delivering knock-off-junk to college students is an interesting business model, but I might question it's global scale-ability.

Deep Throat... Interesting, you think I am JACK. I WISH. NO I AM NOT. Just pointed how absurd the article here is. I don't care about Alibaba's global scale ability, I don't even like the company. You know, just I was doing my dissertation proposal and got bored and saw something crazy and found a time killer. But I assume you guys are just arrogant and ignorant aren't you? Go short BABA and good luck. Hope the result gonna be as great as EDU gave you.

In fact I also don't really believe the number on sales that Alibaba gave. There's tons of methods that they can manipulate it. Yet it's like, Alibaba telling me "3 times 8 is 30" and the article said "you don't multiply them together, you add, 3 times 8 is 11".

let's assume those figures are all fake and bigger than they reported ... but you can't make up the usage of Taobao & Tmall & Alipay and other ecosystem partners they have ... people in China including HK & TW shop a lots on these sites, Alipay/wallet is touching every points in their life ... you can fake the popularity and experience ... you don;t buy it because you have never used it before .... but short sell could happened anytime, long term - you can;t lose

I do not think alibaba make up the numbers, rather it is the way of how consumers using it that distort the actual reality. Eg sellers in taobao is famous for their 刷单 activity to push up the sale and get good comment on their products, to and fro, build up the transaction numbers.

Cainiao smart logistic is getting bigger and better, huge demand will drive innovation to the point that they will beat amazon in logistic very soon, the picture that you are relying on was small scale delivery point, try to search the big one, you can see the differences. Rather than relying on western media, better to have a on the ground approach to china to know what is it like. Two things you had get it wrongly, first anglo superiority mentality, ecommerce is one of the sectors china outperform the west in clear advantage, you used too much of western company as standard indicator when a lot of them is already on the losing sides. Alipay is used in many daily routine transaction eg vending machine, payment for bills, payment for offline purchase in shops, normal lunch payment and many more. It reach a point where mobile phone tied with alipay app is the wallet for ordianry chinese in china. Paypal or visa has a lot to learn from it, which explain why you fail to understand because you are using western standard, when alipay is future standard for the west.

Secondly, alibaba is not just a ecommerce company, they are in fact more than that and will be even more in years down the road. I wouldnt waste much time on illustrating, as it all reports in chinese media, go read it yourself, Alibaba is innovative in finance, travelling, entertainment, health, logistic etc. some of them still beginning but the way they approach to new industry with new way to do things, it really make me wonder how big they can become, even if some business eventually failed like 11main.com, their innovation spirit is something western company can learn from. If you think ecommerce, alibaba had hit limits in china, think again, they are with seller and manufacturer sides, unlike amazon with buyers sides, enemy with sellers and unrelated with manufacturers. Alibaba can reach globally with their vast amount of sellers selling all kind of things that amazon wouldnt even sell. They are in fact in a path to be more successful than amazon in exploring global market, at the same time building up buyers satisfaction. China ecommerce is not whats alibaba aiming for, global market is their aim, if you take that in mind, you will know that the number reported this year will be small in comparison if they successfully going global.

Extra points to add, to balance your view, some direct report from chinese media is one of the sources to rely on. I always find that western always lag or not reporting whats going on in china, making western investors in blind on the reality. Same logic applies, If you are investing in japan market, japanese linguistic skill in your employee is crucial. Hope it helps.

If everything turn out to be ok, no accounting issues, alibaba will be something amazon, ebay, paypal, visa, master need to learn from. I cant believe those elite companies turn out to find themselves living in stone age.

Alibaba processed $14 billion over 460 million packages. I saw the mailing system, the images, are you kidding me? I don't believe it. Why don't we have cameras from the mailing place and trucks comming out of the distribution system, then we will know if this is true. Honestly, it logistically impossible. Or have jack ma, show the alipay credit statement which would be verified by a real US auditor, then I will believe. Plus, baba still sells alot of fakes and he said his company is going after them, yeah ok.

These are the same people who built the Great Wall of China, without robots. And btw, I have used Paypal at 3:00 AM. And btw II, I read that Jack Ma employs 2,000 persons just looking for counterfeit goods.

Louisville attorneys warn of unintentionally buying, selling counterfeit goodsKasey CunninghamNov 12, 2015 11:16 PMLOUISVILLE, KY (WAVE) – A Bullitt County man was indicted on federal charges after he bought counterfeit bike helmets online and sold them on eBay. But his attorneys said their client did not know the goods he was purchasing off a wholesale site were counterfeit.

Matthew Stepp is being charged with seven counts of mail fraud and two more counts of trafficking counterfeit goods. His attorneys, Jimmy Nicholson and Greg Troutman, said Stepp bought Giro Aeon Specialized and Catlike bicycle helmets off of the websites Alibaba.com and AliExpress.

Both websites are part of the Alibaba Group, according to the company’s website, they are a global e-commerce site that sells a variety of items at wholesale from manufacturers across the world.

￼[MORE: Couple faces judge in connection to 3-year-old's death]

“They sell a myriad of goods and the come represented as genuine so when you buy them you are led to believe they are legitimate,” Troutman said.

Nicholson and Troutman said the websites are to blame for the federal charges, and Stepp has been under the impression he has been purchasing legitimate goods from the website.

Stepp’s attorneys said in November of 2014, his home was raided by US Customs and Border Patrol and officials seized the helmets.

Punishment for the charges could mean up to 20 years in prison. Instead, Nicholson and Troutman are placing blame on the site that sold Stepp the bike helmets in the first place.

“Alibaba and AliExpress should really be prosecuted,” Nicholson said.

If it turns out the goods are counterfeit as stated in the federal indictment, Stepp’s attorneys will argue he did not know the goods were counterfeit.

“How do we know the suit I’m wearing or the Cole Hahn shoes that I’m wearing are legitimate and not knock offs? That’s the issue here,” Troutman said. “The prosecution has the burden of proving beyond a reasonable doubt he knew that what he was selling was counterfeit. If it takes an expert to figure out whether the goods or real or fake how is the average person supposed to know that?”

Now they are warning other buyers and sellers to be cautious of these wholesale sites.

“The buyers and the sellers both need to be aware of what they're getting,” Troutman said.

Stepp and his attorneys have filed a civil suit against Alibaba and AliExpress. WAVE 3 News reached out to the company for comment but did not hear back as of Thursday evening.

There has always been lots of "I Love Alibaba" rhetoric out there. I understand, I get it. Alibaba is ubiquitous, everyone in China uses it. It's everywhere. It's a "beloved" company. The concept is GREAT! Conceded. My concern has always been about shareholder value and transparency. Unfortunately, Alibaba has neither. What's the real value of this stock? People are beginning to catch on. I've posted a Video Clip from CNBC, Pacific Square's Herb Greenberg saying the same things I've been saying for more than a year on my blog.

http://deep-throat-ipo.blogspot.com/

I especially liked Herb's characterization of Alibaba's financials as "a wet, tangled, ball of yarn". Again, it's all in the filings, all we have to do is read them.

Sure, you the author wouldn't qualify for the entry level job after posting this post.

You aren't familiar with Walmart, (big box stores) pre-automation days. Read up on that material and books.

Do you know how many ten of thousands of goog, msft employees are unlisted because they are contract, part time? Did you know, of the campuses overseas that goog owns and operates under various company names, that perform the back end work for goog main products? No. You don't know much apparently. Warren Buffet sits at his desk and never visits his investments. You are far from a Warren Buffet. All other investors go to plants, sites, buildings first hand before making such large blank statements.

Jack, good to hear from you again! Well thought out, measured and researched commentary as always. Don't get so upset though, you've had a good run. But, we're onto you. Luckily, if you stay in China you'll be insulated from US prosecution. The SEC can't/won't extradite. The truth will set you free. Hallelujah!

John, BABA's share price has almost doubled since you put out this post two years ago. Maybe it's time to do a follow-up.

You'd probably agree that BABA's sheer size shocks people, which naturally leads to doubts about the validity of its reported numbers. If I were you, I'd reexam what promopted me to think there is any comparability between the Single Day package number and Amazon's total number of accounts. Investors' home bias?

In contract, the market seems to give Amazon a free pass. The market is fine with AMZN not disclosing readily available operating stats such as number of accounts and pacakge volume. Why don't AMZN share information on the profitability of its Prime members as a cohort? No one questioned why a company constantly touting its cash generation ability had to raise 100% of the purchase price in debt to acquire a company 3% of its size?

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